The IS/LM/BP analysis suggests that, if the BP curve is flatter than the LM curve and the exchange rate is flexible, expansionary fiscal policy will lead to __________ of the Country's currency, which will make the fiscal policy __________ effective in influencing National income than if the country had a fixed exchange rate.

Question

Quizplus · Accepted Answer

With a flexible exchange rate, expansionary fiscal policy increases interest rates, attracting foreign capital and causing currency appreciation. This appreciation reduces net exports, offsetting the fiscal policy's impact on national income, making it less effective compared to a fixed exchange rate scenario.

The IS/LM/BP Analysis Suggests That, If the BP Curve Is